Hi Guys,
A few days ago MFOer Tampabay recorded that he was rooting for a Florida State win in the Rose Bowl. He was disappointed: Oregon 59 over Florida State 20. It was a disaster and not an especially well played game.
But it was not an unexpected disaster. I suspect that Tampabay’s enthusiasm was prompted by home-state loyalty, and not a careful analysis of the strengths and weaknesses of the competing teams. That’s a dangerous way to lay a wager or to conduct business.
Until the second-half of the Rose Bowl contest, Florida State had prospered from an unprecedented outlier-like string of comeback victories. No team can tempt defeat so often, and yet emerge with a late rally win in a consistent manner. Luck had to be a major factor. Florida State is just not that exceptional or talented.
And luck changes instantaneously at unpredictable, unexpected, and unwelcomed moments.
Florida State suffered their upset moment on New Year Day. Simply put, the Florida State team experienced a regression-to-the-mean. All good things must come to an end, to a reversion to more normal outcomes.
What is true in sports is equally true in the investment world. Outlier rewards are not sustainable. That’s why loading a portfolio with last year’s winners is most likely a loser’s game. The issue is not if a reversal will occur, but when that turnabout will happen. It will surely happen.
Nothing demonstrates this happening more clearly in the investment option world than the famous Periodic Table of Returns that is issued in many formats. I have discussed these illuminating Tables in many earlier MFO postings.
The evidence strongly suggests that forecasting future returns is an unfathomable task. That insight is embedded in the historical data sets themselves. It is nicely summarized in the various Periodic Table of market Returns charts. Here is a Link to the Callan Periodic Table:
https://www.callan.com/research/files/757.pdfHere is a Link to the MSCI Sector performance Periodic Table:
http://www.msci.com/resources/factsheets/MSCI_USA_Sector_Indices_Returns_and_Volatilities.pdfI have posted these references earlier, but they do need repetition to make the point memorable.
Financial writer Ben Carlson just published a column on this same subject. He titled the piece “Updating My Favorite Performance Chart”. Here is a Link to it:
http://awealthofcommonsense.com/I too consider this chart one of my favorites. It presents extremely broad asset class returns over a
10-year period.
The chart once again illustrates the random nature, the patternless character, the ramblings of the various major asset classes over the last decade. Good luck on consistently picking these winners ahead of time.
This is a big reason why active mutual fund managers have such a challenging task to outdistance an appropriate benchmark. It adds another dimension to investment risk. Forecasters can’t forecast with any reliability. It’s that reason plus the additional handicap of higher expenses in several directions that dampen active mutual fund returns. There’s an easy lesson here.
Please give the chart a little time. It’s worth the effort, and just might contribute to a more profitable 20
15. I hope so. Good luck and good health to all.
Best Regards.
